The financial situation across and beyond 2023 is concerning for many and it may be difficult to figure out how your pension fits into the ongoing crisis. In this blog post, we answer the main questions you might have about how inflation could affect your pension fund throughout the year.
How does rising inflation and interest rates affect pension funds?
With UK inflation currently at 8.7% (much higher than the government’s target of 2%), this has various knock-on effects. The main impact is on the pound as it declines in value, causing prices to rise – meaning the money in your pension has less worth over time.
Inflation can also impact your pension contributions over time, no matter the form it takes. Some people decide to invest their pension in shares, which typically pay dividends long-term. Profitable companies are also much more likely to weather the financial crisis than liquid cash assets.
What happens to pensions in a recession?
If poor economic conditions persist over the years, this means your pension might struggle to increase in long-term value. You may even need to invest more of your yearly income to keep up with inflation, or your pension would effectively offer less money than you put into it.
This is yet another incentive to invest your pension assets in a way that is more likely to bear fruit – this allows you to take advantage of rising prices. Though many people decide to invest their pension in shares, you could also select government bonds or even precious metals.
How to protect your pension
There are other steps you might take to make sure your pension fund is safe from rising costs – for example, it may help to simply re-evaluate your budget. Cutting expenses gives you more money that you can put towards your pension, letting you compensate for any funding issues.
Staying informed about current inflation rates and seeking expert financial advice may also boost your general financial strategy. An inflation-linked annuity could also be a worthwhile investment – this pension type might offer a smaller pay-out at first, but is able to rise in tandem with inflation.
Over the next few years, the disparity between your pension and inflation rates nationwide may be worrisome, but there are still ways you could navigate these problems. Integritas Financial Planners Ltd can offer excellent pension advice to help you make the right choices – get in touch for more information.
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